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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional liability

Dalwood & Partners audits Corvane Co. Before the audit report was signed, the audit partner knew that Corvane's finance director had shown the draft audited statements to a prospective investor, Elmsworth Capital, who would use them to decide on a specific share purchase. The partner did not object. Which statement best describes the auditor's position regarding Elmsworth?

A duty of care to Elmsworth is likely, because the auditor knew the identified investor would rely on the statements for a specific share purchase and did not object. Knowledge of purpose and recipient creates proximity, even without a contract.

  1. AA duty of care is likely to exist because the auditor knew the purpose and the identified recipient of the statementsCorrect
  2. BNo duty exists because only shareholders can rely on the audit report
  3. CNo duty exists because the auditor has a contract only with Corvane
  4. DA duty exists automatically to every potential investor in the market

Explanation

Knowledge of an identified third party and a specific transaction, with acquiescence, creates proximity and makes it fair, just and reasonable to impose a duty. Lack of contract does not prevent a tort duty. A duty to all potential investors is rejected as indeterminate liability.

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